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To Trust or not to Trust

...the HMRC that is, must indeed be the question in the many minds of UK resident non-domiciled individuals (otherwise referred to as ’UK res non-doms’) who may have moved to the UK with full intention of mitigating their exposure to UK Inheritance Tax, Capital Gains tax and Income tax by settling their assets into an offshore trust structure.

In recent years, there has been a considerable UK legislative impact on UK res non-doms such that the prolific tax benefits which once were, are no longer in abundance. The hugely controversial changes in taxation rules which were enacted in the Finance Act 2008 when the remittance of offshore income and gains became an expensive privilege rather than a right for UK res non-doms had a far-reaching impact for offshore trustees in terms of rebasing of assets, restructuring and more onerous on-going reporting requirements to contend with.

More recently, the changes announced by the Chancellor in the Budget on 21 March 2012 some of which are still in the consultation phase, makes the decision as to whether UK property should be owned personally or through an offshore structure a more difficult one. In summary, the main changes are:

  • On 22 March 2012, a punitive Stamp Duty Land Tax (SDLT) charge of 15% was levied on the acquisition of residential property costing more than £2million by a "non-natural person". A "non-natural person" includes amongst others, companies and partnerships in which a non-natural person is a partner.
  • A proposal to introduce an annual charge on residential property ("mansion tax") which will apply only to those entities caught by the new SDLT charges. The rates applicable depend on the value of the property, increasing annually in line with inflation.
  • A CGT charge to apply, from 6 April 2013, on the sale of UK residential property over £2million, by any non-natural person but for the purposes of the extended CGT regime, a non-natural person may be given a broader definition and may include trusts. It however does not apply to certain partnerships, only the members if they are non-natural persons. This CGT charge will apply to the total gain accrued during the ownership of the property (and not only the gains accrued after implementation of the new charge in April 2013). This makes rebasing the asset a vital consideration.
  • The CGT charge is also to apply to the disposal of shares in a company, where more than 50% of its value is in UK land.
  • The latter three points are enduring a consultation phase which runs until 23rd August, with an expected introduction on 1st April 2013.

What to do (or not to do) now for clients with existing offshore property holding structures, should be determined on a case by case basis and will depend on the IHT profile of the client; whether they are UK resident/non-resident; whether the UK property is currently held in the name of a trust or company, as well as other considerations such as need for confidentiality, ability to obtain life assurance and/or debt to reduce the value of the property.

Where buyers are looking to purchase UK property now, holding it through an offshore company still provides the sheltering from IHT, whereas if acquired in personal names, the value of the property will be exposed to IHT at 40% on death. However, alternatives do exist and we, at Affinity, have a well-established network of recognised tax and legal specialists providing up-to-date expert advice and working together with us to tailor practical solutions for our clients to ride the waves of legislative change and maintain for them the peace of mind that their families have been financially provided for with a trust fund after their demise, managed by people they can trust.

It is important to remember that irrespective of residential property, offshore structures still remain very attractive tools for high net worth individuals in terms of confidentiality, long-term succession planning, probate avoidance and inheritance tax mitigation.